Chinese stocks are poised for further losses before their valuations bottom, according to Morgan Stanley, as weakening growth and consumption momentum weigh on sentiment. Offshore shares may fall another 10%-15% before reaching their historical valuation level of about eight times 12-month forward earnings, analysts including Laura Wang wrote in a note dated Sunday. Mainland-listed equities are likely to see a similar de-rating to about 10 to 11 times forward earnings.
"Concerns over selling caused by trust tax, pressure on e-commerce, a weakening macro and elevated global market volatility has caused an acceleration of China's market correction," they wrote. "Additional developments over the past two weeks have further exacerbated the negative momentum."
China's onshore shares are in a bear market, with persistently sluggish consumption and waning policy support clouding the nation's growth outlook. A global retreat in artificial-intelligence stocks has added to the pressure, while Hong Kong remains vulnerable to swings in global bond yields and expectations for the Federal Reserve's policy path. Morgan Stanley continues to favor onshore shares as the national team steps up support for the market. Mainland equities also have "bigger concentration in the higher revenue and earnings growth segments in AI related, hard-core technology and innovation companies," the analysts said. The onshore benchmark CSI 300 gauge is trading at 11.6 times 12-month forward earnings, while the Hang Seng Index trades at 9.5 times.
One signpost to watch is high-profile buying by the national team. The market has tended to bottom one to two months after such purchases when accompanied by public commitments from policymakers to stabilize equities, the analysts added. "What has happened demonstrates that Beijing is currently trying to change the marginal supply/demand balance and establish a floor without brute-force intervention," according to the note. "This more proactive messaging and still ample dry powder, based on historical experience, suggests that stabilization of the A-share market could be more visible now, likely within another month or two."
Source: Bloomberg Markets · Summarized by HeadlinesBriefing